Understanding Government Finance

A government budget is not like a household budget. This report introduces the financial operations used by a central government with a free-floating currency, and explains how they differ from that of a household or corporation. The focus is on the types of constraints such a government faces. This report introduces a simplified framework for the monetary system, along with the operating procedures that are associated with it. Some of the complications seen in real-world government finance are then added onto this simplified framework. This report also acts as an introduction to some of the concepts used by Modern Monetary Theory, a school of thought within economics. Modern Monetary Theory emphasises the real limits of government action, as opposed to purely theoretical views about fiscal policy.